Credit Agricole

Asia overnight

G10 currencies have been treading water overnight, largely shrugging off the pullback in UST yields and the slew of underwhelming headlines. NATO is reportedly set to label China as a “challenge” to its security at its next meeting starting today. Meanwhile, the G7 is discussing tougher sanctions on Russia with the possible option of a price cap on oil and gas imports, as the gathering concludes today. And on a less global scale, Scotland First Minister is due to unveil her plans about holding a second referendum on Scottish independence at a hearing before the regional parliament this afternoon. Against a rather uncertain backdrop full of pitfalls, volatility could thus come back any time in global markets, especially as month-, quarter- and semester-end flows loom, while today attention could focus on the first day of the ECB’s Sintra forum, with ECB President Christine Lagarde being set to make her introductory statement at 9am BST.

USD: the next shoe to drop in the FX recession trade? The war in Ukraine has triggered a global commodity terms of trade shock that fuelled investors’ stagflation fears and brought closer the next global economic downturn. As a results, the FX investor will increasingly focus on global activity data releases in coming days and weeks. And, while they will still pay attention to upcoming inflation data (e.g. the May US core PCE on Thursday and the Eurozone June HICP on Friday), the releases may matter only to the extent that they can impact the Fed’s and ECB’s hawkish policy stance from here, which, in turn, will drive the tightening of the global financial conditions and thus determine the likelihood of the next recession. The high-yielding, safe-haven King USD has been reigning supreme while currencies of both G10 commodity exporters and importers were selling off in recent months. We think that growing recession concerns should trigger powerful repatriation flows out of the USD and into funding currencies like the EUR, JPY and CHF as investors in the Eurozone, Japan and Switzerland start to reassess their outlook for the slowing US economy from here. In turn, this could make the USD the next victim of the FX recession trade.


European Open

Cross-asset gyrations continue. Weakness in China stocks from the open saw a modest risk-off ripple through markets, with overseas selling seen for first time in three sessions. CNH struggled initially before paring the move, while CGBs rebounded as repo stabilized, taking back part of Monday’s selloff. G10 FX is calm with all pairs little changed while volumes run ~30% below normal for the time of day. Spot desk flags some JPY demand, though despite a quiet session look for month-, quarter-end flows to pick-up from here.

Rebalancing dynamics may see choppy price action ahead. EUR, GBP, and USD hear from ECB speakers in the Sintra Forum, BoE’s Conliffe, and Fed’s Daly, respectively, while HUF awaits a 50bp hike and energy markets take particular note of resuming talks between Iran and the US (time unknown).

In focus

Ready to listen.

G10 FX is all sitting close to New York closing levels during a subdued Asia session, with our eFX trader sees volumes running ~30% below normal for the time of day. Our spot desk saw some pockets of JPY buying as stocks softened, though note it has otherwise been uneventful. Today’s spot date is month-end so we don’t rule out some choppy two-way action as the day progresses.

The potential for quarter-end flows keeps us cautious in overinterpreting some of the intraday moves. As a reminder our CitiFX Quant colleagues see FX hedge rebalancing flows resulting in USD demand, with the buy-signal at 1.7 historical standard deviations, based on their preliminary estimates.

Cross-asset moves remain choppy. China stocks were heavy, led by tech names after leading much of the recent rally (HSTECH +13% MTD), with our sales desk seeing flows skewed 2:1 in favor of sellers out of the gates, particularly in internet names, though this turned more balanced as the session progressed.